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As a college student, should I continue investing or save to pay off my debt first?

I currently have $9,000 dollars in student debt, and I still have one more year of college left which will cost roughly $10,000 or more with food expenses for that year, plus an additional one year of grad school at a NYS public university which will I have to pay tuition and living expenses for.

Should I maximize contributions to my IRA for this year? I have $11,000 in savings and I will be going back this summer to my internship where I will earn $5,000 and then will have an internship for the following summer making roughly $25 an hour (about double my current pay rate). I don't want to miss out on a year or two of investing, but I also want to pay off my debt and anticipated debt. I currently have two years worth of full contributions in my IRA.

Debt, Investing, IRAs
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1 week ago

It's great that you’re taking charge of your financial future by investing, and you stand to benefit greatly from compounding interest over time. Paying down debt versus saving for the future is one of the classic financial tradeoffs for young people to consider. Ultimately, putting money towards your loans is a positive thing, so you can’t go wrong contributing more, but you can optimize how you choose to divvy up your funds so that you can save for retirement and manage other more immediate expenses simultaneously. The biggest factor in this decision is typically the interest rate on the loan - student loans are not viewed as “bad debt” (example of “bad debt” is debt that carries a balance on your credit card), so having loans that you pay off over time can be a smart way to balance your overall financial picture. If, for example, you are borrowing at 4% on a student loan and investing in an IRA with a long term growth expectation of 8%, the spread works in your favor. If instead you are borrowing at 4% and holding excess cash in a checking account yielding 0%, the spread does not work in your favor and the cash would be better used to pay off the debt.

This may seem obvious, but it can get complicated if you have multiple loans and/or multiple servicers. Take stock of how much each loan is for and the interest rate on each so you can begin prioritizing the loans with higher interest (usually those exceeding 5%) and pay them off faster to avoid accruing more interest than you need to.

As your financial priorities shift in college and beyond, make sure you’re increasing your emergency fund to match your growing expenses, like increased costs for rent and groceries, and are adapting your investing strategy to meet your short- and long-term financial goals. Once you graduate and get a job, make sure you explore any employer-sponsored retirement plans available, as those often come with tax advantages and matches that are like getting free money from your company. 

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